Widespread skepticism about
prepaid tuition plans patterned after MET emerged in 1988, when states "largely
began to prefer the college savings bond concept engineered by Illinois,"
researchers Aims McGuinness, Jr. , and Christine Paulson note in their 1989
survey for the Education Commission of the States.
[15] Subsequently,
Illinois' Baccalaureate Savings Act has emerged as the model for college
savings bond programs nationwide. In January 1988, $90 million worth of bonds
were sold in the first program's first sale, with demand possibly as high as
$270 million. During the second sale, in September 1988, $255 million worth of
bonds were sold, with demand as high as $400 million. Future sales are planned
for the bands, which may be used for anything, including non-educational
purposes.

Marketed as zero-coupon
bonds that cost approximately $935 to $3,700, the Illinois program offers a
$5,000 maturity over a five-to-20-year period. The Illinois zeros pay a rate of
return that varies from 6.9 percent short-term to eight percent long-term, and a
four percent annual bonus if they are used for tuition at
in-state institutions of higher education. The bonus amounts to $20 per year per
bond. Added incentives are the denomination, which is smaller than regular
Illinois general obligation bonds. Another important aspect of the program is
the educational and marketing effort required to inform parents about the
options available for financing a higher education and the need to save money in
advance. Finally, the bonds are tax-free and offer flexibility because
they can also be used to pay for tuition at private colleges.

College savings bonds hold
a more immediate, financial interest for states, in addition to the benefits of
encouraging families to save for college. Unlike general obligation bonds,
states issuing zero-coupon bonds are not liable for any interest until maturity
because the interest is imputed at issuance. By comparison, general
obligation bonds earn interest payable to bondholders every six months.

Researchers McGuinness and
Paulson note that college savings bonds do not "pose any special risk to states
in terms of an unknown financial liability. Unlike tuition pre-payment plans,
college savings bond programs do not pretend to promise that the return on the
security will keep pace with the cost of higher education ...Primarily because
of the fewer risks involved, states in 1988 and 1989 have been more prone to
adopt the college savings bond model."

One criticism of college savings bonds, McGuinness and Paulson note, is that
"this sort of state involvement tends to give the appearance of official
approval or license to a college savings program that may or may not be better
than other alternatives. However, state officials generally say they are most
interested in promoting college savings, rather than the bonds themselves."
[17]